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Vendor risk management is all about the pre-plan

Supply chain failures compromise the ability of an organisation to operate effectively and in extreme circumstances even to survive.

Yet many businesses struggle to mitigate the risk of such failures due to poor vendor risk management: research from CIPS suggests fewer than half of procurement professionals consistently put strategies in place to counter the dangers, while similar numbers haven’t analysed the potential costs associated with disruption.

That is potentially disastrous for their businesses. Procurement fraud alone costs UK businesses £127bn a year by some estimates. And if your organisation doesn’t have good visibility over the resilience of its supply chain, including the extent to which your suppliers are exposed to risk through their own practices, you can’t begin to manage your exposures.


Essential pre-plans

Get to grips with the risk each supplier brings to your business – how credible is each of the organisations on which you depend?

By getting to grips with issues such as suppliers’ creditworthiness, payments history, data security and their own supply chain resilience, you can build a much more in-depth picture of any threat they may propose – and manage the danger accordingly.

Try to avoid a tick-box approach to evaluating risk – you need a more sophisticated analysis of the different levels of maturity your suppliers may have.  There’s no substitute for diligent supplier analysis – it’s the only way you can hope to fully understand the extent of the risk they pose.

Don’t assume, either, that your suppliers will necessarily have done this analysis for themselves, or that they understand what kind of a threat they may represent to you and other buyers. They’re certainly less likely to have analysed the resilience of their own supply chains. You may need to work with these organisations to help them become more risk aware.

Be prepared to have a dialogue with your suppliers in order to build more trusting and confident relationships that endure over time. Where risks have been identified, what plans, if any, does the supplier have in place to mitigate them?

And what might you be able to do to support them in this process? One option could be to move towards different payment options, shortening payment terms through initiatives such as invoice discounting, for example, to improve their working capital.

It’s easy to focus on short-term gains and easy cost savings – payment practices, for example, may offer an opportunity for a quick win on your organisation’s cash flows.

However, supply chain resilience is a long-term, existential concept – the advantages you may secure from extending payment terms, say, may quickly be eclipsed by the cost of replacing a supplier that unexpectedly goes out of business. Focus on building strong, long-term relationships based on mutual trust with your suppliers.

Supply chains – and the suppliers that form the links – can and do change over time, so your practices need to be flexible enough to evolve accordingly. You need tools and technologies in place to ensure ongoing and current visibility – and the willingness and ability to respond to new risks as they emerge. The closer your relationships to key suppliers, the more chance you have of being able to adapt quickly and effectively.

Once you understand where the risk lies, you can put response plans in place in readiness for the day when a particular danger crystallises. Your organisation needs to be able to quickly determine which supply is affected, which products and services will be at risk, and what the options for alternate supply might be. Such contingencies will hopefully not be needed, but your organisation should be able to mobilise these response plans very rapidly.


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Financial Risk Management

This network brings together professionals involved in the oversight and management of their company's financial risks and exposures as well as solution vendors, in order to discuss risk issues including interest rate risk, foreign exchange risk and commodity price risk, among others.

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